Peter Mycroft Psaras'  Instablog

I have been trying to buy Amazon (AMZN) for five years now, but because I only buy companies that have a price to free cash flow of 15 or less, I was hoping they were going to miss and allow me to finally get in, but alas they blew away the quarter and I am going to have to wait again. With their increase in TTM Free Cash Flow to $1.92 Billion, my buy price has now moved up to $63.85.

I am so impressed with their results that I will probably have to up my purchase rule  and add some more risk, by bumping my buy price to 20 times free cash flow and look for an entry point of $85 a share. My sell criteria is 30 times free cash flow or $127.50, so if I ever get lucky enough to get in at $85, I will have a long way to go before I will need to sell.

People will probably say I am crazy and Amazon will not get back to $85 anytime soon, but they said the same thing about Coach (COH) , which not only went down to 15 times free cash flow but then proceeded all the way down to 7.52 times.  I learned a long time ago for observing warren Buffett’s purchases, that you have to set your price and wait (sometimes for a long time) until the stock hits that price. It took me seven years to buy Coach, but I got it!

Amazon has a Free Cash Flow Return on Invested Capital (FROIC) of 42%, which for those who don’t know what that means, it’s simply for every  $1 of capital employed Amazon generates $42 cents in free cash flow. Those are amazing numbers as I like to usually buy companies with 20%+ FROIC.  It’s main bricks and mortar competitor Wal-Mart (WMT) for example has a FROIC of just 8 while having a Price to Free Cash Flow of 23.  So for every $1 of Capital Amazon employees they return 525% more free cash flow than Wal-Mart.  And as for Barnes and Noble (BKS) they are no threat as they have of FROIC of 8.25%.

There is only one game in town and that is Amazon, So please fall to $85 so I can get some of your stock.

 Disclosure; Long COH, no positions in WMT, AMZN, BKS

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Mycroft Research, and should not be construed as personalized investment advice.

 It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.